Renters insurance is a type of coverage that should be well thought out. If life does throw an unwanted curveball at you, be it a fire, theft, or a fluke accident, you want to ensure you’ll be covered, both financially and with peace of mind.

Not sure where to start? Whether you’re getting your first place or have been gambling by going without renters insurance for years, this article will break down two types of renters insurance policies in detail so that you can make the best choice for your individual needs.

What is renters insurance?

Put simply, renters insurance is coverage the protects your possessions in the event of a disaster or unforeseen event. This type of insurance will cover your belongings against loss from vandalism, theft, smoke, fire, windstorm, lightning, water damage (excluding floods) and more. Similar to homeowners insurance, you are covered under renters insurance if someone should get injured on your premise and file a claim.

Your landlord might have insurance to protect the building you live in. But their policy will do nothing to protect your individual possessions. If your home is a complete loss, the structure may be rebuilt but you’ll be coming back to an empty home.

Replacement cost coverage is generally going to be a little higher in rates since it pays out more. Actual cash value will pay the cost of replacing your possessions, but only at depreciated value. It’s important that you really understand the distinction between both before deciding on which coverage you want.

Actual cash value

Actual cash value renters insurance will pay to replace your possessions minus their depreciation. For example, your couch may have cost you $3,000 when you bought it, but this was ten years ago. The depreciation deduction could leave you with very little actual cash value as the item’s actual cash value will be the amount it is worth on today’s market.

The benefit of going with actual cash value on your renters insurance is that you will have lower monthly premiums since you will only get the depreciated value of your damaged items. However, you might not get enough reimbursement to fully replace your items.

If you’re just starting out and don’t have much to claim yet, an actual cash value policy could save you some money while you save up for matching furniture sets and your dream entertainment system.

Replacement

If you’re concerned that an actual cash value policy could still leave you with a financial wound, a replacement cost policy is worth looking into.

Replacement cost will pay for replacing your damaged, destroyed, or stolen possessions at full value without deducting for depreciation. This is often estimated as the amount you originally paid for the item. If this particular item is not available any longer, you will still get the original price you paid for it to find a similar item. Should the item you bought be available but the price for it has been reduced, the value for it might be reflected in your claim.

In some cases, the replacement cost might be paid in a couple installments. The insurer might often send an initial ACV payment for the item or half of the entire replacement cost. After you have purchased a replacement, documentation will need to be sent in by you to the insurance company so they can send you the remaining amount.

The benefit of choosing replacement cost on your renters insurance is that your damaged item will be replaced fully at current market value. No depreciation is deducted; however, you will have a slightly higher monthly premium.

If you own high-end furniture, several televisions, laptops, and other electronics, or have filled your home with plenty of décor accents and furnishings, a replacement cost policy is best for you. Certain items can depreciate quickly, even if they’re still in great shape. This policy will ensure you can replace any lost items with those that won’t leave you feeling shorted.

What else should I know?

No matter which of the discussed policies you choose, there are a few situations that aren’t covered. This includes flooding, earthquakes, and hurricanes. To further protect yourself, you may want to consider purchasing floaters, or additional policies.

There are also limitations on certain types of coverage. For example, most policies have limited coverage on items like jewelry. If your jewelry box is a bit light, the limited coverage could be more than enough. But if you’re a collector of the finer things in life, purchasing additional coverage is the wise thing to do.

When obtaining renters insurance, it’s essential that you take inventory of all your possessions you wish to cover and assess the value of each for replacing them should accidental damage, disaster or theft happen.

How do I know which is right for me?

Still not sure which insurance policy you should go with? Tallying up the current value of your possessions and receiving quotes for both types is a great place to start. But speaking with an insurance agent will guarantee you the perfect coverage.

Keep in mind that you can always change your policy. What serves as proper coverage today might be inadequate a year down the line.

If you’ve been flirting with disaster for too long by avoiding renters insurance, the best time to look into a policy is now. The last thing you want to face is a smoldering building and the loss of all your possessions simply because you put off making the initial call.